How do you feel about your shopping this month? It is a question many economists in America are asking as the holiday season approaches.
The current state of the US economy is sparking much head-scratching. Some data seem cheering. Spending on durable goods, for example, rose 1.3 per cent in October, twice the expected level. And Deloitte projects that total consumer expenditure will have risen by a whopping 8.1 per cent in 2021, after shrinking in 2020.
That is partly a catch-up effect after the pandemic lockdowns. But consumers have benefited from stimulus cheques, a booming stock market and an apparent abundance of jobs. Indeed, there are currently 1.4 vacancies per unemployed person in America – a historic high – and a record 4.4 million Americans voluntarily left their jobs in September. Social media is buzzing with the QuitToks craze, where people share videos on TikTok and Instagram that celebrate their feelings of liberation after resigning.
Yet other data are far less festive. If jobs seem plentiful, wage growth is still relatively subdued by historical standards. And though American shoppers are spending, their mood seems peculiarly glum. In November, the Michigan consumer sentiment index, a monthly survey that gathers information on consumer expectations regarding the overall US economy, was running at 67.4, a 10-year low – and some 12.4 percentage points gloomier than in November 2020 (near the height of the pandemic).
This might be down to a time-lag effect. But Richard Curtin, an economist on the survey, also blames the fact that consumers’ wallets are being squeezed by “a combination of rapidly escalating inflation combined with the absence of federal policies that would effectively redress the inflationary damage to household budgets”.
I suspect there is a psychological issue too: one reason inflation sparks such gloom is that price hikes have been so unknown in recent decades that a generation of consumers does not know how to parse the current outlook. The downbeat mood reflects disorientation as much as tangible pain.
Worse still, the shock comes after a year of pandemic lockdowns when consumers have seen numerous other certainties about the future stripped away too. This may be causing their time horizons to shrink. So even if they are happy to spend money right now or to walk away from jobs they dislike, they feel scared about an uncertain future.
This possible psychological explanation is, however, just a hunch: we do not have much data on how consumers’ time horizons may have shifted in a wider sense. And this brings us to another important point: economists and policymakers need to upgrade their systems for tracking the economy right now, to blend quantitative and qualitative perspectives.
This will not be easy. Typically, economists try to project the future by collecting reams of data on the recent past, looking for correlations and then extrapolating forward. Often it works well. However, if consumer behaviour is in flux, the past may not be a good guide to the future; at such moments, we need a worm’s-eye view to supplement any bird’s-eye model.
The events leading up to the global financial crisis provide one example of why this matters. Before 2008, the financial industry tended to value subprime mortgages by using historical data about consumer defaults. That sounded sensible.
However, there was a catch: in the early 21st century, attitudes towards debt shifted. Most notably, when consumers ran out of money in the late 20th century they would typically default first on their credit cards, then their auto loans – and only lastly on their mortgages. But in the early years of the 21st century, a subtle cultural shift occurred that caused this sequence to go into reverse and saw cash‑strapped consumers default on home loans first.
It was hard to see this shift from a distance; it could only be spotted up close. Even economists and analysts lacked that perspective.
(A notable exception was the hedge-fund traders depicted in the movie The Big Short based on a true story, who met a pole dancer in Florida with subprime loans and got a hint of what was going on.) As a result, their models were going wrong – in a way that was hard to see.
Today, other subtle cultural shifts are probably under way. So once again there is a burning need for economists to get more of a different view. Some institutions are trying to do this: the Bank of England, for example, is using ethnographers to get on-the-ground evidence about economic conditions.
Separately, some economists are widening the data sources they use: Alberto Cavallo, a Harvard economics professor, has recently used online, real-time price data to track inflation in a manner that is far more timely and accurate than official consumer price indices.
But far more could, and should, be done. The more that different data signals seem to send conflicting messages, the more important it becomes to combine those bird’s-eye and worm’s-eye views. Rarely has the state of the economy been so fascinating but so hard to read.
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